Come Fly with Me! Delta Air Lines, The World’s Biggest Airline Discusses Why it’s Not the Business Warren Buffett Used to Avoid - With CEO, Ed Bastian. 

0:00The air travel business is a sexy business. It's a business that people pay attention to. My good friend Sir Richard Branson says the best way to become a millionaire is to start as a billionaire and buy an airline. They absorb a lot of capital and they can lose a lot of capital fast. We're the number one business partner of American Express and they are our number one business partner. Every plane we take today is generally about 25 % more fuel efficient than the planes that we retire. Aircraft manufacturers is probably more to the engine that many of their predecessors had. None of them have come out and announced what their new product is going to be.

0:36What's the next generation going to look like? I don't see the shape of air travel changing much because none of them are investing tens of billions of dollars it's going to take to create all new platforms. We need to continue to keep climbing. That's our tagline. It's keep climbing. We need to always get better because we know everyone is chasing us. Airlines are a terrible business. They're capital intensive, unionized and heavily regulated. There's very little moat. So said Warren Buffett at some point in the past. But is that still true? And if you look at the share price of our guest firm today, you might question that.

1:17So the aim here today is to examine the thesis for investability, to understand the direction and shape of flying, economics, competition, premiumization, the case for a moat or a structural advantage, what customers want, and the increase in price tiering and possibilities. And to seek these answers, we're extremely fortunate to welcome the CEO of the world's largest airline, Delta, a leader regarded as having driven one of the most successful aviation stories in what continues to be a fast-moving but fractured industry. Ed Bastian, a very warm welcome to the Money Maze podcast. Simon, good to be with you.

1:55Well, we met 11 months ago at the Irish Open Pro-Am at the K Club, which is an unlikely venue for anyone who has seen my golf. But Bob Bradway, CEO of Amgen, former guest and colleague of mine at Morgan Stanley, very kindly put us together. I think you might sit on his board or you know each other from board interactions. And in looking at Delta, I think you might be celebrating 100 years of age. this year or thereabouts. And I see that passenger operations began from Dallas, Texas to Jackson, Mississippi. You acquired Pan Am's transatlantic routes. You were the first airline in 97 to carry 100 million passengers in a calendar year.

2:33But the airline went through bankruptcy and restructuring in 05 to 07. And you arrived, as we're going to talk about, and the subsequent restructuring and takeoff has been quite some story, which seems to prove the investor conundrum that slogans are easy, but investing profitably is hard. But let's start in the control tower with you, Ed. Background, rise and reasoning. When did you develop your own flight plan? Well, it's almost 30 years ago when I joined Delta. I started as an accountant. I was a Pricewaterhouse. And from there, was recruited away by PepsiCo. I spent a lot of time traveling.

3:14And a friend of mine said, you've spent so much time on an airplane, you might as well work for the airlines. And coincidentally, six months later, Delta called and gave me that opportunity, which I gladly took. And I've been here ever since. Started in the finance world. I was CFO of the business, led the restructuring after the bankruptcy following 9-11, merger with Northwest Airlines, considerable amount of work in terms of trying to prove that this is an investable business. And it's great that you opened up with Mr. Buffett's warning about an investment, the Surgeon General's warning, as we like to call it, about it could be dangerous to your wealth.

4:00But Mr. Buffett and the Berkshire team just came back into Delta within the last number of months. So I think we're doing a good job. Fantastic. And I didn't know that. So that's great. So let's start high. I'd like to confirm the Delta data. Just give us a sense of what I've written, the four Ps, planes, pilot, places, and passengers. Well, we did celebrate our 100th anniversary last year. We're the first US airline to reach 100. There's a few European peers that are slightly ahead of us, KLM, I think being one of the oldest. But we have close to 1 ,400 planes, over 100 ,000 employees, 16 ,000 pilots.

4:43We fly to over 1 ,000 destinations. And we have about 200 million customers a year that we serve. Wow. So let's jump to my second vector, the economics of the airline business. And just help me, is this statistic right? that only one in five people around the world have been on a plane. It is right. And it's the opportunity for us in our second century of flight. Here in the States, we are a large airline in the US. About two thirds of our overall business is done in the US. So the opportunity for us is really not as much continued growth and expansion within the US, but continue to move outside the U.S.

5:31boundaries. And when you think about that stat that only one in five people have ever stepped foot on an airplane, it tells you there's ample opportunity for us to look to grow. And growing in some places that we today are not in. We're not in the Indian region in South Asia. We're looking to expand there, grow there. We're launching a new flight to Riyadh, direct flight from the U.S., from Atlanta to Riyadh in the next couple of months. We're growing into whether it's New Zealand or back into the Philippines and Manila, Africa, South America. So there's a tremendous opportunity for us to take this brand.

6:13And when you talk about moats in business and opportunities, those are real moats because you're able to capture your customers early in whether they're flying history or opportunities to bring unique adventure and commerce to certain countries and start to develop a real presence. So we're going to talk about a few of those. I mean, I guess the questions I went through aviation history briefly was Pan Am, TWA, Eastern Brand, America West Spirit, People's Express, Laker, Dan Air. I flew a few of them. You know, was there one or two reasons collectively that they all aren't around today? I think there's several.

6:55I think one that they are, the air travel business is a sexy business. It's a business that people pay attention to, they like to enjoy, can, as a result, attract capital. My good friend Sir Richard Branson says the best way to become a millionaire is to start as a billionaire and buy an airline. And so then they absorb a lot of capital and they can lose a lot of capital fast. So you have to be careful as to how you think about an investment strategy. In the U.S., the model for many, many years, unfortunately, and I think it's true to this day in parts of Europe, it's a commodity. Whoever has the lowest cost can offer the lowest price is going to win.

7:40That doesn't work in terms of building an investable model. You need to have a brand that has a premium offering, an opportunity to have consumers who are attracted and will invest alongside you, which will then bring the capital required by your investor base. And when I started at Delta 30 years ago, if you were to ask people in the U.S. why did they choose a specific airline, over 80 % of them would say whoever had the lowest price. price clearly was not just the number one, it was the number one, two, three reasons why individuals chose an airline. Today, if you ask an individual, why did they choose Delta?

8:21Over 80 % will say because it's Delta. It's a brand I'm loyal to. It's a brand I have an allegiance to because of the quality of the service, the quality of the performance, the reliability, and the opportunity to continue to build relationships outside, not just your flying, but whether it's loyalty or other opportunities that we bring. But before we leave the industry, is it fair to say that Delta is a strategically powerful airline inside a still fundamentally troubled industry? I would say the industry is doing a fair bit better. COVID changed a lot and COVID brought us all to our knees. And I think the airlines such as Delta who were consistent with the strategy about investing in a brand on the back end of COVID, not just previous to COVID, those airlines and Delta is the leader in that are doing quite well.

9:20We have grown our market cap when we went through COVID. I think our stock price dropped to about$17 a share. That's when our friends at Berkshire sold. today, our stock price is$90. So if you look at over the last six years, we're up 5x in terms of share price. So I think that's a pretty healthy gain. And it tells you that people see that we're disciplined about how we're running the business. We're continuing to pay our debt down. We've got our investment grade ratings back from all the big Wall Street houses, one of the only U.S. airlines that can say that. We are a leading brand, not just in the airline space, we're a leading brand in the consumer space within the US.

10:06And our demographic is the upper end, the premium end of the marketplace. We talk about the K-shaped economy in the US a lot. And the upper end of the K belongs to Delta. That's where our people live. So they have the means, they have the discretionary income and they have the desire to travel. So I hadn't had the chance to talk to Warren Buffett, clearly, because I didn't know he'd come and invested in your company. But when you talk about barriers to entry, it is interesting. I think the US beer industry, two corporations run 90 % of beer brands, half of the nation's banking assets are run through five banks, three out of four US households have only one option for high speed entries.

10:44Would it be fair to say that, if not monopolies, but regional control has become a hallmark of the airlines that tend to dominate in the US now? Well, you have four big airlines in the US, all who have within the US similar market share. You have Delta, you have United, American, and Southwest. Southwest is a little different. That's more of a local. That's more of a US, more of a discount model. But all four of us have similar market share, or somewhere between 20 % and 25 % market share. And the rest of the industry has somewhere between 10 % to 20%. So any market that you have four big players that are very competitive, that all take up kind of rough size, they have scale, and they have all similar opportunities, I'd say it's not by any means a monopoly or duopoly.

11:40I mean, it's really what we do with the assets. and how we perform that separates us in that. If you look at the market cap of Delta today, for example, the market cap of Delta is greater than United, American, Alaska, and JetBlue all combined. But yet we have a similar size network. Our revenue base are all fairly comparable. So what it tells you is the performance of the company, the performance of its people in terms of service, it's what's the differentiating factor, not the fact that we have big moats that we put up with walls around our airbots. Yes, we have a great franchise in Atlanta, great franchises in New York and Detroit, Minneapolis, Seattle, Salt Lake, Los Angeles.

12:28Those are all important markets for us, but those are markets others can access. In the airline industry, the only thing that separates one airline from another is the people and the culture of the brand, of the airline. And that's where we win. Our people are the very, very best. And they do the very best service and they get rewarded the best. And so we call it the virtual circle. You take care of your people. They take care of the customers who reward you with the loyalty to attract capital to continue to grow that business. So the problem for investors is they're often trapped by looking in the rearview mirror.

13:04and you can, you know, the aviation industry, I think, has never in aggregate earned its cost of capital. But now there are some differentiating factors. So I had a chat with Pete Davis of Lansdowne. You may know one of the UK's most successful investors. I've been with Pete, you know, for a long time. He has a position, you know, in your company, wrote about it in his quarterly report. He made a couple of really interesting, he showed some pricing, Pan Am's international fares in the 1950s. So London was$548, Zurich was$615. So, you know, We've had sustained price decreases in real terms for a long time.

13:39And are we now getting to the point, given where Delta's return on invested capital is, and you look at Orion Air for their financial operating model, which is very different at a customer level, but as an operating model, would you say that we might be on the threshold of a shift to higher returns for the winners? No question about it. And the reason why is those airlines are focused on the customer and they're focused on their brand and the service quality that they're providing, not just their transportation company. Transportation is what we do, but it's the experience we bring that defines who we are.

14:21And those companies that have that ability to continue to bust through the commodity aspect of a business so that we're not being shopped on price any longer, but we're being shopped on the experience, those are the winners. And we have let that charge, Simon, for the last 15 years in the US. So this is not an overnight sensation. As I mentioned, the pandemic knocked us back for a little bit, but we've recovered nicely. And actually, I think it propelled us as we came out the other end. And we've got a consumer base that's hungry for adventure. It's hungry for experience. And that's also a differentiator.

14:59You've never had the demand set to travel and the interest in travel at the higher end of the curve, particularly willing to invest and spend the monies required to be able to pay for all the service that we deliver. In the past, we've discounted it because we wanted to make sure that we were able to fill up the planes. We've moved the geography of the planes around, so we're providing a more premium experience, a more premium product. Delta One, every new plane we bring was one third of the entire plane is in the premium cabin sections. Very different than Orion Air, obviously, as you mentioned.

15:41And that premium model, we've had to shift our business model. So when you talk about the past to the present, we don't look anything like what we did 20, 30 years ago when I started this business. So this, I have written down premiumization. And I notice, I do fly a fair amount. I've noticed that the BA business cabin seemed to be longer. I've noticed that EasyJet allowed you to buy a middle seat so you could put your bag there and not have somebody right on top of you. Even Wizz Air, not that I've flown them, I think have business class. So you mentioned the K-shaped economy, but I wrote down what does the customer want?

16:18But I guess you have different customers. So how do you think about those people who use Delta? Well, the most important thing that customers want is the quality of the experience. They want from not just an airline, but particularly Delta, they want a highly dependable, reliable service. They want hospitality delivered, not just travel logistics. They want to feel like they matter to the airline and there's a relationship. That the brand brings more than just travel. The loyalty perks, for example, our relationship with American Express is a standout around the world. We're the number one business partner of American Express and they are number one business partner.

17:00This year alone, American Express will pay Delta$9 billion for use of the credit card and the miles that they put on the credit card. And you talk about a differentiating experience that never existed years ago. It doesn't exist in Europe because of the banking and the credit differences and the regulatory apparatus. So customers want experience. And if you can provide a great experience, they're willing to spend the money it takes to deliver that. IFM Investors is a global asset manager founded and owned by pension funds with capabilities in infrastructure, equity and debt, private equity, private credit and listed equities.

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18:26They're designed to be active, not reactive, so investors can target enhanced returns and achieve better long-term outcomes. Discover why JPMorgan Asset Management is the home of active ETFs. Search JPMorgan Active ETF or tap on the link in the notes to this episode to find out more when you invest your capital at risk. I had written down reduced turbulence, by which I meant competition. Now, in reading your most recent report, I got the impression that the industry has changed and it's much tougher for new entrants now to gain a foothold. Just explain what's been going on. So, particularly in the US, but I think it's happened around other parts of the world.

19:12And a lot of this, again, is post-COVID, is the cost of entry has gone up substantially. Again, you can't be a commodity provider if your costs are going up. You look at what's going on with fuel alone. Fuel has gone up dramatically over the last number of years, and it's up again with the impact of the war going on, jet fuel particularly. When you look at the cost of pilots and people, the fact that we had in the US a real challenge, having enough qualified pilots, because a lot of the people retired during COVID. And what happened is those pilots that worked at the lower end carriers wanted a better experience after COVID to work for an airline like Delta.

20:00So many of them left their jobs and came to work for Delta, the higher end experience, which brought not just the the overall industry upscale, it brought wages up too across the industry. You look at the cost of airports, you call the investment required in airplanes. You look at the fact that the OEMs, Boeing and Airbus particularly, but also the engine manufacturers haven't been able to produce as much supply to the market for issues that are well documented. So there's been a bit of a cap on capacity coming in, new capacity to the marketplace. All of those things work to hurt a carrier that is built on high growth, low cost, and kind of a lower end product.

20:49In the US, now again, Ryanair is a different model in Europe than in the US. There's not really a comparable Ryanair within the US. But in the US side, and as a result, you've seen companies like Spirit go bankrupt and disappear, liquidate just a couple of months ago. So you've got to be disciplined. You've got to be able to get your cost met. You've got to be able to provide a product that people are willing to pay. And as Delta has been changing the consumer mindset, airlines are trying to now copy Delta to stay up with us so that they can make sure that they're getting the same returns and the same revenue share.

21:27And so whether it's United, American, even Southwest, we're all talking about becoming more premium as a brand. I got it. I want to go back to that SkyMiles, your frequent flow program, because it becomes such a big, you said, approaching 10 billion. I know that you've been commenting on that. Just talk us through what was the opportunity you spotted and exactly how it works and why it seems to be quite a sticky asset to have. Well, the US credit card industry and consumers in the US have a lot of choice for what cards they use to pay on. And many credit card companies give you cash back. They'll give you 2 % or 3 % off.

22:11There's an assortment of goodies that you receive. The thing that we know is that consumers value and want to travel more than just getting 2 % or 3 % back on their spend or any of the other bundles of things that credit card companies are offering. And our relationship with American Express has been for 30 years. So we've been at this for quite a while. But again, we started the program 30 years ago, 15 years ago. Maybe that comparable number was in the$1 to$2 billion range. Just in the last decade, it's gone close to$10 billion. And the reason for that, I believe, first of all, Amex as a brand is a highly effective brand.

22:55And it has an aspirational component to it. It's going to younger audiences. And all of our young consumers, Gen Z, Gen X, millennials, all these people that have entered into the workspace in the last 20 years feel like Amex is the brand that they want to carry as their credit card provider. And they identify with it. They also identify Delta as the aspirational brand, the premium brand in the travel space. One of the things that consumers that are younger is they want to travel. They want to explore and they can use their credit card to buy things and get the opportunity to then go travel as a result of that.

23:31We saw some during COVID when people were not allowed to travel, when the skies were closed, yet people were home shopping and buying things and using their credit card. We saw a big pop in our revenue base from the AmeriExpress SkyMiles program because people wanted to have that currency to utilize when they return. The currency is one of the things about air travel and currency is that it's priceless in a certain way. You can use that currency for whatever you want to use it for. We've made it so that we're agnostic as to you can use miles or dollars and made it very easy for people to use it as a free-flowing currency for our brand.

24:17And when people think about air travel, they think about the destinations and the places that they want to see or the friends they want to meet or the places they want to go and learn or play golf even in the UK. And they don't really attach that to kind of the cost per se, the dollars, because they have the miles. They have the miles in the bank that can go do it. And it accrues value to them. And many of the people will take those miles and they'll keep it in their wallet. They'll keep it in the bank and not spend it. And they're going to save it for a few. And then it compounds as they continue to grow and build more and more affinity with the brand.

24:56So it's a very, very sticky currency. We have many partners that we provide offerings, whether it's Uber, T-Mobile, the telecom company here in the U.S., others that we are working with, Starbucks, where you can actually get the currency and use the currency on their brands and bring their customers. into our ecosystem as well. So you see this growing sphere of influence that's coming in terms of where travel and Delta sits in the middle of it. And so as a result of that, the value, the performance, the power of the SkyMiles are much bigger than what Delta has. That's all the brands. And by the way, you can also use it on our international partners, Air France, KLM, Korean Air, Aeromexico, LATAM, go across the world, Virgin Atlantic.

25:45Well, you can use the SkyMiles on. So it's something, again, that has changed versus the old model. And it's one of the reasons why investors would look now at Delta and say, hey, this is not just an airline. This is also a loyalty play. And the loyalty play has real sticky value. And we've seen the stickiness. Even during COVID, when we were having a hard time raising capital for the business because of what was going on. we were able to go and raise a substantial over$10 billion against the currency, against the SkyMiles themselves. It's the first time we have done something like that. And at that valuation, I think they put the value of the currency at close to$30 to$40 billion currency alone.

26:31So that's very clear. Thank you. And if we get back to this international trajectory that you're on, there are a lot of places that you fly to. I've taken the Virgin, which I think you earn 49 % of. I've taken Delta from LA to New York. You're competing with some operators that don't appear to have the requirements of financial returns. I'm thinking about the Middle Eastern carriers, particularly because they're operating with other aims and ambitions. How do you prioritize where you want to allocate capital internationally? We want to go where our consumers and principally US consumers want to go since we are a global brand, but we're principally a US brand.

27:13The principal consumer base is US. 75 % of our international travel is purchased by US consumers. And that means they want to go places that they know and they've heard about. So, Europe for the last number of years continues. I was over in Europe a couple of weeks ago for visiting a lot of Americans. And I was in Croatia, I was in Portugal, the American health of the dollar and the strength of the US economy continues to push people out. People want to go to Asia. Asia was a place that I think a lot of Americans are starting to discover. Going to Australia, going to New Zealand, going back to Hong Kong.

28:00We launched back into Hong Kong recently. South America is another place there's a lot of interest going into whether it's Argentina or Brazil or Peru, Colombia, and we have partners that we work with and we fly directly to all those markets. So those are the markets. Middle East is a white spot for us. We're going to be launching into Riyadh. Tel Aviv, we do serve. And I think India is probably the next spot in that. We used to be in there. We haven't been there for a number of years. I think we're going back. And we do watch, you know, we go look at places where the Middle Eastern airlines, for example, are owned by their governments.